Ann and Tom want to establish a fund for their grandson's college education. What lump sum must they deposit at a 6% annual interest rate, compounded quarterly, in order to have 20000 in the fund at the end of 15 years?

Solution

A nn an d T o m w an t t o es t ab l i s h a f u n d f or t h e i r ​ g r an d so n^{'} s co ll e g e e d u c a t i o n . Wha t l u m p s u m m u s t t h ey d e p os i t a t a 6​% ann u a l in t eres t ​ r a t e, co m p o u n d e d q u a r t er l y ​, in or d er t o ha v e ​20000 in t h e f u n d a t t h e e n d o f 15 ​ ye a rs ?

Principal : 8185.92

Solution steps

Translate the problem into an equation:

20000 = P (1 + \frac{0.06}{4})^{4 \cdot 15}

Solve for

P, 20000 = P (1 + \frac{0.06}{4})^{4 \cdot 15} : P = 8185.92

Principal : 8185.92